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This research will contribute the literature of managerial ability and cost of capital. This study is the first to investigate the association between managerial ability and cost of capital to the best of our knowledge using Demerjian et al. (2012). Managerial ability is the measurement methodology which is the most commonly used method to evaluate the managerial ability in the literature. In a previous study, Mishra (2014) investigates the relation between CEO managerial ability and cost of capital by using Custodio’s (2013) CEO managerial ability methodology. This method only measures the ability of CEOs based on their experience. Those who have several experiences in different departments and other sectors are regarded as generalist CEOs, while some others who have one specific experience in a department and/or sector are regarded as specialist CEOs. Mishra shows a positive relation between generalist CEOs and cost of capital; it is regarded as the dark side of managerial ability. Mishra explains this relation by the risky behaviors of generalist CEOs. Mishra argues that generalist CEOs have lots of job opportunities. They also tend not to focus on the long-term financial soundness of the corporations—aiming to increase revenues sharply in short terms to improve their reputation. We extend Mishra’s analysis by employing firm fixed effect to its model. We find that the impact of general CEO managerial ability which is defined by Mishra (2014) as the dark side is not significant once the employ firm fixed effect is considered. This analysis assesses the effect of managerial ability on cost of capital by using Demerjian’s methodology. It was found that the impact of managerial ability on cost of capital shows a negative significant relation in line with expectations. More able managers lead to less cost of capital. This finding is in line with literature of the impact of managerial ability on company performance. We also employ firm fixed effects to our models and confirm the study’s findings. It is shown that the relation between institutional ownership and cost of capital is also significant. Further, there were many channels examined to identify possible causes of this negative relationship. It is expected that able managers disclose more information; they also help to reduce forecast error and eventually improve performance. The relationships between managerial ability and information disclosure, managerial ability and forecast error, as well as managerial ability and performance are significant. The channel effects are also explored by employing firm fixed effect, as mentioned previously. All the models present significant relationship.

The link between the cost of equity and reinsurance purchased by insurers is examined in this study. This work extends the research on the economic value implications of corporate risk management practices. Utilising a framework based on the theory of optimal capital structure, this study puts forward two hypotheses to test empirically the cost of equity – reinsurance relation in the United Kingdom’s non-life insurance market. The first hypothesis tests the effect of the decision to reinsure on the insurers’ cost of equity, whereas the second hypothesis focuses on the link between the extent of reinsurance purchased and the cost of equity. Panel data samples drawn from 469 non-life insurance companies conducting business in the UK insurance market between 1985 and 2010 are used to test these hypotheses. The study employs a modified version of the Rubinstein-Leland (R-L) model to estimate the cost of equity. Both the hypotheses put forward are supported by the empirical evidence obtained through regression analysis. The empirical results suggest that, on average, users of reinsurance have a lower cost of equity than their counterparts who do not reinsure. The results also suggest that the relationship between the cost of equity and the level of reinsurance purchased is non-linear. It is inferred from this result that reinsurance can lower the cost of equity for primary insurers provided the cost of reinsuring is lower than the reduction in frictional costs achieved through reinsurance. This finding validates the use of the theory of optimal capital structure as the appropriate framework to guide this research. Robustness and sensitivity tests confirm that the influence of multicollinearity and endogeneity on the estimates is negligible. This study thus provides new and important insights on the impact of reinsurance (risk management) on firm value through its influence on the cost of equity. These findings are deemed useful to various stakeholders in insurance companies, including investors, managers, regulators, credit rating agencies and policyholder-customers.

This thesis investigates the pricing (or mispricing) of earnings quality in Australia. It investigates whether information in earnings quality is used by investors in valuing firms, evidenced by an association between earnings quality and the cost of equity. In the alternate form, the question may be posed as whether earnings quality is mispriced by investors such that there may be opportunities to earn abnormal profits from trading strategies based on earnings quality. Ten earnings quality constructs are studied: total accruals, unexpected accruals, cash-to-profit, accrual quality, persistence, predictability, smoothness, relevance, conservatism and timeliness. In the cost of equity pricing tests, when earnings quality is proxied using one construct (accrual quality), it is found to be associated with the cost of equity. However, when the additional nine constructs are included in the regression models, accrual quality loses statistical significance. Various other constructs are found to be associated with the cost of equity depending on the choice of the cost of equity proxy. In the trading strategy tests, there is some initial evidence of trading strategy opportunities for firms with high quality earnings. However, after deleting outlier observations with annual buy-and-hold returns of greater than 200% the potential for earning abnormal returns from a hedge portfolio strategy disappears. The existence of Australian evidence on the accruals anomaly provides a convenient basis to validate the results of the earnings quality trading strategy tests. Although no clear evidence on the accruals anomaly is found, results are obtained which appear to be consistent with prior Australian evidence of the accruals anomaly, depending on the research design choices made. Overall, the evidence on whether earnings quality is priced or mispriced in Australia is best viewed as inconclusive. It highlights the importance of conducting thorough robustness tests and suggests a need for caution by researchers in making inferences from a narrow set of earnings quality constructs and research design specifications.

This thesis investigates the pricing (or mispricing) of earnings quality in Australia. It investigates whether information in earnings quality is used by investors in valuing firms, evidenced by an association between earnings quality and the cost of equity. In the alternate form, the question may be posed as whether earnings quality is mispriced by investors such that there may be opportunities to earn abnormal profits from trading strategies based on earnings quality. Ten earnings quality constructs are studied: total accruals, unexpected accruals, cash-to-profit, accrual quality, persistence, predictability, smoothness, relevance, conservatism and timeliness. In the cost of equity pricing tests, when earnings quality is proxied using one construct (accrual quality), it is found to be associated with the cost of equity. However, when the additional nine constructs are included in the regression models, accrual quality loses statistical significance. Various other constructs are found to be associated with the cost of equity depending on the choice of the cost of equity proxy. In the trading strategy tests, there is some initial evidence of trading strategy opportunities for firms with high quality earnings. However, after deleting outlier observations with annual buy-and-hold returns of greater than 200% the potential for earning abnormal returns from a hedge portfolio strategy disappears. The existence of Australian evidence on the accruals anomaly provides a convenient basis to validate the results of the earnings quality trading strategy tests. Although no clear evidence on the accruals anomaly is found, results are obtained which appear to be consistent with prior Australian evidence of the accruals anomaly, depending on the research design choices made. Overall, the evidence on whether earnings quality is priced or mispriced in Australia is best viewed as inconclusive. It highlights the importance of conducting thorough robustness tests and suggests a need for caution by researchers in making inferences from a narrow set of earnings quality constructs and research design specifications.

The economic utility of sustainability has been a recent domain under scrutiny by several academicians. More specifically, researchers have investigated the positive effects of sustainability reporting on firms from different angles. One of these angles is sustainability’s effect on firms’ prestige in the market, which is inevitably connected to market indicators, such as, risks and returns. Consequently, this research paper is positioned as a complement to previous researchers’ work within the field of sustainability reporting and its positive effects on firms. This paper’s foremost aspiration is to fill a knowledge gap in research by finding empirical evidence whether the first time assurance on sustainability reports causes a lower subsequent cost of equity capital. For this matter, the researchers’ methodology was deductive in nature, which relied on investigating established theories that are connected to the two dimensions of the research question; cost of equity capital and assurance on sustainability reports. This investigation formed the researchers’ theoretical schemata upon which they both neglected certain theories in favour of others and formed a verifiable theoretical research hypothesis. In this research, Sweden, a country known for its dedication for sustainability, was chosen as a market from which a sample was collected. The researchers conducted their study in a panel format where the same information about 44 different companies was collected on several years. Due to the fact that the number of listed firms that had been reporting their sustainability reports was quite moderate, a census study was convenient and applicable. The researchers ended up with a sample of 44 firms that constituted 352 observations, which formed the basis for the statistical inference. The empirical study employed several regression models of panels to reach the most representative model that fitted the data in hand. Also, to guarantee higher quality results the fitted model, the Two- way Error Component Fixed-effects Model, was tested for heteroskedasticity, cross- sectional correlation, autocorrelation and non-stationarity. This model revealed a relatively low explanatory power that drove the researchers to interpret their statistical findings with great caution. At a specific level of statistical significance, the regression model revealed a significant correlation between assurance on sustainability reports and a subsequent lower cost of equity capital. This result was refuted at higher levels of significance. Thus, the researchers were able to answer the research question affirmatively, to a certain extent, and to demonstrate that the research’s results verify the underpinnings of neo-institutional and signalling theories.

This thesis is dedicated to determination of cost of equity capital. The main objective is to evaluate whether the cost of equity may, in its calculations, vary depending on the size of a company. The means for achieving the results can be comparison of calculations of cost of equity by model with historical returns actually achieved. This is what many empirical studies are focused on. A partial goal of this paper is to analyze the results of selected studies and their mutual comparison. Relevant theoretical explanations will be also presented.

This dissertation investigates the relation between firm disclosure, analyst forecast bias, and the cost of equity capital (COEC). Since analyst forecast bias is associated with both implied COEC estimates and disclosure, it is important to control for or remove it from COEC estimates when estimating the relation between disclosure and ex ante expected returns. I begin my analysis by predicting and removing systematic ex ante bias from analyst forecasts to produce de-biased analyst forecasts that better proxy for the market’s ex ante earnings expectations. I use these de-biased analyst forecasts to produce estimates of ex ante expected returns, both at the portfolio- and the firm-level. In addition, I develop a novel estimate of ex ante expected returns by applying Vuolteenaho’s (2002) return decomposition framework to ex post realized returns and accounting data. Finally, using several techniques to control for analyst forecast bias and self-selection bias, I find theoretically consistent evidence of a negative association between regular disclosure and ex ante expected returns. I predict and show that inferences can change when analyst forecast bias is controlled for.

This dissertation investigates the relation between firm disclosure, analyst forecast bias, and the cost of equity capital (COEC). Since analyst forecast bias is associated with both implied COEC estimates and disclosure, it is important to control for or remove it from COEC estimates when estimating the relation between disclosure and ex ante expected returns. I begin my analysis by predicting and removing systematic ex ante bias from analyst forecasts to produce de-biased analyst forecasts that better proxy for the market’s ex ante earnings expectations. I use these de-biased analyst forecasts to produce estimates of ex ante expected returns, both at the portfolio- and the firm-level. In addition, I develop a novel estimate of ex ante expected returns by applying Vuolteenaho’s (2002) return decomposition framework to ex post realized returns and accounting data. Finally, using several techniques to control for analyst forecast bias and self-selection bias, I find theoretically consistent evidence of a negative association between regular disclosure and ex ante expected returns. I predict and show that inferences can change when analyst forecast bias is controlled for.

Economics Value Added has two major characteristics that differ from the traditional accounting measure. First, the process of counting EVA includes the cost of equity. Second, it corrects distortion of Generally Accepted Accounting Principles¡]GAAP¡^by equity equivalent reserves. The purpose of this study is to test the relationship between performance measure EVA and stock return. Furthermore, we investigate if conbining these two parts provides additional information. In addition, the difference between literature and the study is that we use not only OLS regression model but also Panel Data Model. We choose a more suitable model to analyze our sample data. Our main finding is as follows¡G 1. Since sample data involve cross-section and time-series data. The result of test is that the Fixed Effect Model of Panel Data Model is more suitable for sample data. 2. Base on the Fixed Effect Model, the relationship between EVA and stock return is positive. 3. Considering the cost of equity and equity equivalent reserves increases the R-square respectively by 2.408% and 1.915%. It doesn¡¦t increase much power to explain stock return apparently. However, by F test, we find these two independent variables are obviously explainable. In a word, base on the Fixed Effect Model, there is relationship between EVA and stock return. Moreover, the joining of the variables of the cost of equity and equity equivalent reserves can explain contemporaneous stock return a little more.